Thursday, 27 September 2007

More than any other democracy, India’s government plays a delicate balancing game in shaping its external relationships. The pitfalls before New Delhi have been highlighted recently, first in the domestic opposition to the US-India nuclear deal and, this month, over Exercise Malabar, a massive naval war-game in the Bay of Bengal. While the Indian Navy manoeuvred alongside its US, Japanese, Australian and Singaporean counterparts, our communists drove along the coast, educating the proletariat about American Imperialism and hurling invectives at the warships, separated from them by some 800 miles of water.

The day after Malabar concluded, Indian and Russian paratroopers began an elaborate, ten-day, counter-terrorism exercise in Pskov, Russia. Simultaneously, off the coast of Somalia, the Indian Navy began an annual training routine with French warships. Last week, army Special Forces began a 24-day exercise, dubbed Himalayan Warrior, alongside 150 British Royal Marines in the high plateau of Ladakh. This November, Indian warships will exercise with the People’s Liberation Army’s fleet in the East China Sea.

This military engagement with each of the world’s important powers reflects the enormous changes in India’s foreign policy since Indira Gandhi’s days when India was non-aligned in name and a Soviet client in truth. Today, while nominally a member of the non-aligned club, India has embraced what can best be termed as “superalignment”, an even-handed cultivation of everyone who counts.

Rajiv Gandhi’s overtures to China and America, and Narasimha Rao’s agreement with China on border peace, were India’s first steps towards portfolio diversification. But superalignment really found traction after the 1998 nuclear tests. A short stint in the doghouse was talked into a “global partnership” with America. With the Moscow-Delhi axis alive and well, New Delhi also signed up with China for a strategic partnership in December 2005. Last December, Japan and India upgraded their relationship to a “strategic and global partnership.” There are similar strategic partnerships, differentiated only by adjectival prefixes, with some 20 countries, including Mongolia. India’s diplomatic dance, joke some of its diplomats, is increasingly tending to strategic promiscuity.

New Delhi’s many alliances reflect its domestic political preferences. The multiple strands of Indian opinion link up with constituencies across the globe. The Left parties have traditionally backed China; Britain, France and Japan find wide acceptance in the political centre, and nobody forgets Russia’s support during the Cold War. Even as the Left Front trashes the US, a Pew Global Attitudes poll last year found that 56% of all Indians, especially the young, support the USA. Only in Nigeria was there greater admiration for America.

Diplomatic superalignment also stems from India’s economic and commercial interests. The stability of India’s oil supplies and the interests of millions of expatriate workers demand good relations with the Gulf countries; simultaneously, India nurtures a growing arms relationship with Israel. America and Europe are India’s biggest foreign trade partners, even as trade with China catches up fast.

For India’s partners, these multiple relationships are often troublesome, for example Washington’s ire at New Delhi’s refusal to openly abandon Teheran. But, from their viewpoint, India’s attractions far outweigh its seeming capriciousness. A liberal, increasingly free-market democracy, a potential counter to China, a power that dominates the Indian Ocean sea routes, an economy growing at almost 10% per year, an investment opportunity for $150 billion in new infrastructure, the world’s biggest arms importer, soon to be the biggest buyer of nuclear power generating equipment; wherever one observes from, India is a desirable partner.

Superalignment, New Delhi believes, has yielded valuable diplomatic dividends. Near the top of India’s global agenda today is obtaining an exemption from the Nuclear Suppliers Group on the ban on nuclear trade. Not one country, not even China, seems willing to openly scuttle an exemption for India. That is also true for India’s other big project: permanent membership of the UN Security Council.

In the 1980s, Australia had led other South East Asian countries in a vocal campaign against India’s growing naval power, complaining that a two-aircraft carrier navy was beyond India’s legitimate needs. Today, with India’s navy far bigger and better equipped, and some $26 billion being spent on new warships, Canberra sheepishly calls that a closed chapter.

The Marxists are, therefore, incorrect in believing that India’s participation in exercises like Malabar would pull India into the US orbit, forcing it to play a role in “balancing China”. With so many benefits from superalignment, New Delhi would definitely not like too many eggs in just one basket. Even while joining the “quadrilateral initiative” (formed this year by adding India to the original “trilateral” grouping of democracies: US, Japan and Australia) New Delhi has been careful of Beijing’s sensitivity to what it sees as a potentially anti-China alliance.

When the “quadrilateral” proposed security consultations last May, New Delhi carefully noted Beijing’s immediate demarches to all four capitals, in which it sought to know the purpose behind the meeting. New Delhi agreed to participate only after addressing China’s concerns, when it was announced that there would be no fixed agenda. India has never joined a multilateral security grouping, even when Pakistan signed up with NATO’s regional cousins, CENTO and SEATO. New Delhi will be careful that the “quadrilateral initiative” remains free of security overtones.

A rising power that threatens practically nobody, India gets from superalignment a chain of strong relationships that leverage each other, while still retaining the bilateral space for reassurance, readjustment and reconciliation.

As a growing number of Indian private sector companies gear up for defence production, a market that is projected to do over $50 billion worth of business over the next five years alone, the information technology (IT) sector is taking heart from a recent US Pentagon study. Its findings underline that 60% of America’s cutting edge defence R&D was done by small and medium-sized software companies. Several of these were Indian companies.

The increasing role of software in every defence platform makes India’s IT companies believe that broad based industry bodies like the CII, FICCI, and ASSOCHAM cannot look after the very specific concerns of the software sector in dealing with the MoD. Platforms like the CII, they believe, represent the interests of brick-and-mortar companies involved in traditional manufacture; the specialised concerns of software developers, say these IT companies, would be better looked after by the National Association of Software and Service Companies (NASSCOM).

Responding to these concerns, NASSCOM has formally approached the Ministry of Defence (MoD), requesting that NASSCOM be invited to represent the IT companies which are playing an increasingly important role in defence R&D. Confirming this request, NASSCOM President, Kiran Karnik told Business Standard, “What we’ve said is that there should be industrial representation on the offset policy discussion and finalisation and that NASSCOM would be very happy to be there. Now we’ve not had a formal response on that.”

Informally, however, sources reveal that the MoD has assured NASSCOM that it understands the rationale behind this request. Industry bodies, CII, FICCI, and ASSOCHAM, however, which represent the entire private industry, including software companies, in important meetings with the MoD are not so sympathetic. CII officials point out that most members of NASSCOM are also members of the CII, and big IT companies like HCL and Wipro sit on the defence committee of the CII.

But senior CII officials point out that NASSCOM doesn’t even have a defence division, while the CII has one that specialises in defence issues. Mr Ashok Kanodia, an industrialist on the defence committee of the CII, says, “We have a committee on Communications and Information Warfare also, and in this we discuss in detail all the issues that are relevant to the IT industry.”

While big IT companies like Wipro and HCL do indeed play important roles in CII committees, the medium-sized software developers, do not believe the large companies truly represent the interests of their segment. Bharti Sinha from Infotech Enterprises points out, “Companies like Wipro are into hardware as well as software, so they are also manufacturers. But in the software field, most of the respected, cutting-edge, high technology companies that would be able to contribute effectively to defence manufacture are mid-sized companies with a turnover of between Rs 200-700 crores. They have a different set of concerns.”

NASSCOM will be pursuing its case with the MoD for representing the software industry. The MoD has understood the potential of the IT sector for getting offset tie-ups, as sub-contractors for important indigenous projects like the Arjun tank and the Light Combat Aircraft, and for playing an important role in joint development projects with other countries of high-tech platforms like the 5th generation fighter with Russia. Private sector IT companies have given a sheen of respectability to Indian defence production, and their requests are now being taken seriously.

Facing flak over the poor performance of its Ordnance Factories (OFs) and Defence Public Sector Undertakings (DPSUs), and growing demands to bring the private sector into defence production, the Ministry of Defence (MoD) plans to nominate selected private companies as Raksha Udyog Ratnas (RuRs). These RuRs would be treated at par with the government’s labyrinthine network of factories in getting orders, R&D funding, and access to the MoD’s long-term plans for equipment procurement.

Over 40 private sector companies made presentations to the Prabir Sengupta Committee, set up in May 2006 to screen prospective RuRs. A shortlist of 12 companies was handed over to the MoD on 6th June 07. There the matter still rests, owing largely to pressure from trade unions, which fear that bringing in the private sector would put the public sector out of business.

While the prospective RuRs, including manufacturing giants like L&T and Mahindras, wait in frustration, there is growing protest from India’s IT industry. Small and medium-sized software firms, many of which work at the cutting edge of global military R&D, argue that the playing field is tilted in favour of manufacturing units. To even apply for RuR status, a company must have a minimum turnover of Rs 1000 crores for the three years preceding its nomination. But many of these software companies, which are excluded by this mandatory baseline, are arguing strongly for a lower qualifying threshold, since their entire turnover consists of value-added work, without any bought out or trading component.

NASSCOM, which represents these companies, has written to the Defence Minister and the Minister of State for Defence Production, requesting that:

• The equivalence in eligibility parameters between the manufacturing and the services sectors is artificial, and should be changed.

• In value-added terms, Rs 100 crores of turnover by an IT services company is equal to Rs 250 crores turnover by a manufacturing company.

• To be eligible for RuR status, the qualifying turnover for IT services companies should, therefore, be kept at Rs 250 crores.

The MoD, typically, has not responded, and there is little clarity about the state of play. While Kiran Karnik, the NASSCOM chief, believes that the MoD has more or less accepted NASSCOM’s request, the Secretary of Defence Production, Mr KP Singh told Business Standard that there was no question of adjusting the turnover qualifications for RuRs, because government money could only be entrusted to companies of a certain size and reputation.

Mr KP Singh said, “A lot of government money would be put in the hands of RuRs. To develop front-end projects, they will need government support and money. They will not put their own money for developing high-risk [military] items so the government will have to support their R&D to the extent of almost 80 per cent. If large chunks of government money will be in the custody of RuRs, you need big, trustworthy private companies…. we cannot entrust government money to companies that do not have deep pockets or deep resources. And, in any case, software companies do not require that sort of monetary support for developing software.”

As a result, there may be no software developers amongst the first batch of RuRs, whenever that is announced. Nonetheless, IT companies are confident of cornering much of the business that will flow in through offsets. As one IT executive, from an aviation design firm explained, “Despite aggressive marketing by prospective RuRs, foreign vendors like Northrop Grumman, and Pratt &Whitney know that they cannot confine their business to just 10-15 RuRs; and also that the real cutting edge design is being done by medium sized software companies, few of which have a turnover of more than Rs 200-700 crores.”

But IT companies know that RuR status will expand their footprint in domestic defence production. Several software developers that do not meet the Rs 1000 crore turnover qualification have applied for RuR status provisionally. Others like Sasken and Quest-Global, say they are interested and will apply when the MoD gives the green signal.

Tuesday, 25 September 2007

Since 28th August 2007, when India sent a request for proposals (RFP) to six global aerospace corporations for buying 126 medium multi-role combat aircraft (MMRCA) at an estimated price of Rs 42,000 crores (US $10.5 billion), there has been a buzz amongst India’s defence manufacturers, particularly amongst medium-sized software developers. On the 6th of March, the six aerospace giants will submit detailed bids to India’s Ministry of Defence (MoD), which must include an outline of their offset proposals.

With the RFP mandating that 50% of the contract value must be offset by investment into Indian defence production, roughly Rs 21,000 crores worth of foreign business will be tied up with Indian defence manufacturers over the next six months. A large share of this seems headed for India’s software industry.

Traditionally, offsets in India have taken the form of licensed manufacture of low-tech components, like aircraft doors, in Indian defence PSUs like Hindustan Aeronautics Limited (HAL). But with the Defence Procurement Policy – 2006 (DPP-2006) laying down that the quality of a vendor’s offset proposals will play a role in deciding the contract, each of the six aerospace giants that are bidding for the MMRCA are looking for high-value R&D tie-ups with Indian companies, which they know will fetch them higher credits than mere licensed manufacture.

Vendors emphasise that with a high 50% offset demand, they would have to find mutually beneficial offset proposals, rather than viewing offsets as an external cost on the contract. Their best option, they say, are India’s medium-sized IT companies that are already doing cutting-edge R&D and software development for US defence manufacturers.

India’s Secretary for Defence Production, Mr KP Singh emphasises that India’s software industry provides foreign vendors with opportunities for exactly such mutually beneficial offsets partnerships. Mr KP Singh says, “We have allowed the software industry to be recognised as a legitimate business for offsets, because we fully recognise that they will play a significant role in this.

Foreign vendors, eyeing the MMRCA contract have already swung into action. Lockheed Martin, which hopes to sell the F-16 fighter, and Boeing Corporation, which is hawking the F-18, have already held major supplier conferences in Bangalore. The Eurofighter’s manufacturer, EADS, is setting up a 2200 employee software facility in Bangalore, where developers will work out of EADS facilities, allowing EADS to retain intellectual property rights and bringing everything under one roof.

The industry itself is charged up and confident. Companies like MindTree Consulting are no strangers to defence design, having already worked with US defence majors like Honeywell and United Technology. Mindtree CEO, Krishnakumar Natarajan points out, “In some technologies, such as short range wireless, we’re at the global cutting edge. We’ve created a lot of intellectual property and we’ve demonstrated our ability to build from concept to product stage.”

This global signature is also visible in companies like Quest-Global, which already works for the US Pentagon, as well as for several Indian MoD laboratories. CEO, Aravind Melligeri, explains that firewalls are stringent; the Pentagon’s export controls specify that sensitive US military work is done on US soil, using US citizens as employees. With existing facilities, and a close relationship with US defence majors, Quest-Global hopes for fresh opportunities once offsets are implemented.

Infotech Enterprises, which also does export control work with the Pentagon through a factory in Puerto Rico, has positioned itself differently. While negotiating business directly with majors like Boeing and Lockheed Martin, Infotech has also set up a joint venture with HAL, hoping to get a share of the offsets business that will certainly flow to the giant DPSU.

Software executives, while enjoying today’s buzz, don’t all believe that the foreign vendors’ rush to tie up will result immediately in a rush of business. Infotech Enterprises’ Bharti Sinha explains that both sides, the foreign vendors and the Indian companies, will carefully observe how the first few offsets deals actually play out. Other than the first ever offsets deal in which private companies, L&T and Astra Microwave, cornered the offsets, the forthcoming deal to buy six C-130 Hercules transport aircraft from the US will be watched by firms that plan to participate in offsets.

The US Defence Advanced Research Projects Agency (DARPA) is the tool with which the Pentagon shapes the warfare of the future. DARPA is part-credited with developing the Internet, and futurologist Alvin Toffler’s writing is all about DARPA’s transformational projects like developing a bionic soldier that can fight 24x7 for up to a week, without food or water.

DARPA scans the world for research partners; its only criterion is excellence. And Business Standard has learned that a DARPA team has visited some of India’s leading information technology (IT) companies, soliciting ideas to fund. India’s own Ministry of Defence (MoD) has barely made headway in harnessing the IT industry’s skills, even though software makes up at least one-third the cost of a modern weapons system, like a tank, a warship or an aircraft. DARPA, in contrast, told the companies it visited that:

• It will fund any project that could assist US national security, regardless of where the project originates.

• With an R&D outlay of $3 billion dollars, each project that DARPA funds could get up to $20 million a year.

• There is no time horizon for DARPA’s projects; it will fund R&D for as long as the project seems viable.

Now, a year after DARPA’s visit, India’s MoD has swung into action. On 21st September, in New Delhi, Minister of State for Defence MM Pallam Raju inaugurated the first meeting of the Defence Information Technology Consultative Committee (DITCC), which brings together the military, the IT industry, academia, and government officials. The DITCC will advise on how to harness the IT industry’s talent to improve defence R&D and production.

The DITCC has its roots in unusual teamwork between NASSCOM and the MoD. Over the last eight months, teams of software engineers from the Defence Research and Development Organisation (DRDO) have visited private sector IT companies to observe their design capabilities and global business practices. In turn, IT industry engineers have visited DRDO establishments and come away convinced there are benefits in working together.

In June 2007, the DRDO and NASSCOM signed a Memorandum of Understanding (MoU) that, for the first time, lays down a framework for cooperation. The MoU recognises that:

• The DRDO has successfully developed leading technologies in defence-related areas like aerospace, control systems, and communication, etc. As the Indian IT industry moves up the value chain, this experience is of great interest to it.

• The IT industry’s rich experience in complex projects would greatly help the DRDO in reducing the time it takes to develop a military product.

• The current vendor-customer relationship between the IT industry and DRDO needs to be changed to a long-term partnership model of co-development.

The MoU’s most important function is to lay down clear guidelines for quantifying R&D work that flows from the MoD. Defence R&D frequently involves changing the specifications of the product, this undermining the original contract. The recent MoU specifies criteria by which private IT companies will be paid for extra work that arises from these changes. Additional billing will be based on internationally accepted criteria like “extra lines of code” or “additional man-hours of work”. This will remove the messy renegotiating and re-tendering that delays government R&D.

The NASSCOM chief, Kiran Karnik, who has played a major role in taking forward this partnership, sees a clear synergy between the MoD and private software developers, where the IT industry could write the voluminous software codes that form the building blocks of a military system, e.g. an airborne radar, and the DRDO could then integrate those building blocks into a full system.

Mr Karnik explains, “The DRDO doesn’t have the technical capabilities that the IT industry has developed. Nor does it have the sheer scale, the numbers (of software developers) in-house. The DRDO is interested in drawing that capability in. What the DRDO does have is the ability to do software integration. In, say the Light Combat Aircraft, they’ve been doing the integration of all sub-systems.”

The MoD’s glacial speed of decision-making and lack of transparency has long turned off the IT industry, but now change is coming. Secretary for Defence Production, KP Singh, points out the security benefits of developing software indigenously, rather than depending on foreign suppliers. Mr Singh told Business Standard, “Algorithms have to be developed that have to be kept secret from the enemies’ hands. These are all areas in which our software industry can play a significant role and the defence department fully recognises this.”

Friday, 21 September 2007

India’s nonaligned movement of the 1960s and ’70s is giving way to a new kind of foreign policy school: “superalignment.” Unusually, this strategy relies upon strong bilateral relationships with all global and regional powers—even those whose relations with India may be troublesome in many ways. Each relationship is leveraged by the combined weight of the others. While this approach can be uncomfortable for India’s partners, so far, it’s working largely to New Delhi’s advantage.

To see superalignment in action, look no further than India’s recent military ventures. This month, India joined the United States, Japan, Australia and Singapore in naval warfare games in the Indian Ocean. The day after the drill, dubbed Exercise Malabar, concluded, Indian and Russian paratroopers began an elaborate, 10-day counterterrorism exercise in Pskov, Russia. In November, Indian troops will exercise with the People’s Liberation Army in Chengdu, China, and its warships will exercise with China’s fleet in the South China Sea. Over the last two years, the Indian Navy has wargamed with 20 navies.

Superalignment may have had its genesis in the early 1980s, when Rajiv Gandhi’s administration started warming up ties with the U.S. after decades of frosty relations, and de-escalated tensions on the border with China after two decades of armed standoff. This was the beginning of foreign policy balance, ending a lopsided diplomatic dependence on Big Brother in Moscow.

But the policy really found its footing after India’s 1998 nuclear tests cooled New Delhi’s warming ties with the West. Alongside its traditional treaty partner, Russia, New Delhi warmed to China enough to sign up for a strategic partnership in December 2005. Last December, Japan and India up- graded their relationship to a “strategic and global partnership.” The U.S.-India relationship is back on, too. India’s diplomatic dance, joke some of its diplomats, is increasingly tending to strategic promiscuity.

These alliances largely reflect India’s domestic political preferences. The current ruling Congress Party coalition and its allies on the left, are a disparate group, encompassing a wide set of views. The left parties have traditionally backed China; the political center holds Japan, Britain and France in high regard, and no one forgets Russia’s support during the Cold War. Much of the younger generation supports closer relations with the U.S.—a fact all parties have to acknowledge.

India’s economic and commercial interests also naturally necessitate a wide range of diplomatic relationships. The stability of India’s oil supplies and the interests of millions of expatriate workers demand good relations with the Arab states, nurtured alongside a growing arms relationship with Israel. The U.S. and Europe are India’s biggest export markets, even as trade with China catches up fast. India is an observer in the China-led Shanghai Cooperation Organization, but also seeks to join the Association of Southeast Asian Nations, in which the U.S. participates.

India’s partners tolerate superalignment, in part, because of the country’s strategic location. A fast-growing alternative power in a region where China’s influence is growing, India dominates sea lanes that carry much of the world’s trade and energy flows. The Andaman and Nicobar chain, India’s island possessions in the Bay of Bengal, sit astride the 10 Degree Channel, which funnels more than 60,000 ships yearly into the Strait of Malacca. A newly established Indian military command, with a complement of fighter aircraft, warships and amphibious troops, has transformed this archipelago into a base from which forces can quickly counter any threat to this global shipping highway.

India is also an increasingly important economy, to which its allies want access. Growing at over 10% a year, India, like China, is seen as Asia’s “new tiger.” Prime Minister Manmohan Singh says that India needs foreign investment of about $150 billion over the next seven years in infrastructure alone. Already among the world’s biggest arms buyers, India will spend another $50 billion on foreign weaponry over the next five years. If the Nuclear Suppliers Group gives its nod to a pending U.S.-India deal on nuclear cooperation, New Delhi will pay out an estimated $150 billion for nuclear reactors. That’s not small change.

New Delhi has worked to soothe tensions over its many and competing alliances through smart diplomacy. Within hours after the 2004 tsunami, for instance, the Indian Navy dispatched warships laden with supplies to Indonesia, Sri Lanka and Maldives— despite commitments to relief efforts on its own shattered coastline. During the Israel-Lebanon conflict in July 2006, Indian warships mounted an international evacuation operation from Beirut, the only navy that carried hundreds of people to safety. Australian Defense Minister Brendan Nelson remarked earlier this year that the Indian Navy was the only “reliable” force from the Malacca Strait to the Red Sea.

That’s not to say that superalignment works perfectly all the time. India’s policymakers walk a fine line to balance their partners’ competing interests. Since 2003, New Delhi has chosen not to join the U.S.-led Proliferation Security Initiative, a treaty that claims the right to interdict any transfers of banned weapons and technology. China, which opposes the program, is pleased; Washington is not. So Indian policy makers—many of whom share U.S. concerns about China and North Korea’s proliferation to Pakistan—decided to let the Indian navy participate informally.

Some “superalignment” tensions will never fully be solved, such as India’s juggling of its simultaneous friendship with Iran and the U.S. Despite relentless opposition from Washington, New Delhi continues to negotiate a natural gas pipeline from Iran to India; even while doing that, India has voted against Iran’s enrichment program in the U.N.

Nevertheless, New Delhi believes super- aligment has yielded valuable diplomatic dividends. No country, not even China, stands openly in the way of India’s most crucial global goals: obtaining an exemption from the Nuclear Suppliers Group to carry on nuclear trade, for example, or permanent membership of the U.N. Security Council.

Signals such as these suggest that India’s historical aversion to multilateral security groupings is unlikely to disappear anytime soon. New Delhi believes the growing U.S.-India partnership provides sufficient leverage against China without reinforcing it with a provocative quadrilateral security partnership. Superalignment seems here to stay.

Thursday, 13 September 2007

The responses to the Arjun tank story that I did on NDTV, as well as in the Business Standard are revealing. The rationale behind most of the postings is: Ajai Shukla has seen the light! At last he’s come around to admitting what all of us knew all along: that the Arjun is a brilliant tank.

Many folks don’t read carefully… they just run their eyes over a page and jump to a conclusion. And then they turn into pamphleteers, guided by a pre-conceived viewpoint and using rhetoric and half-truths to purvey that point of view. For journalists, on the other hand, every word is important and describes events that are happening or have happened. That’s very different from the way pamphleteers write and understand things.

But let’s not go there. Let’s just answer the question that someone asked: “Mr. Shukla, I would like to know what information you have learned during the last 2-3 months which made you turnaround on your stand on Arjun.”

To begin with, let’s be intellectually rigorous. There are two avatars in which I write: one, as a journalist, and secondly, as an analyst. As the former, I don’t have a view; I only report what is happening. When I write as an analyst, I convey my views. And like a good analyst, it’s based on a clear knowledge of what’s happening.

For now, let’s just look at journalism.

In this specific case, I’ve reported all along on how the Arjun project is coming along, what is going wrong, what is going right, what the DRDO is doing and saying, and what the MoD and the military attitudes and policies are.

The position right now is… as my stories on NDTV and the Business Standard say… many of the problems that had plagued the Arjun have been sorted out. In contrast, one of the problems that afflict the T-90 has NOT been sorted out. Therefore, the army is trying to scuttle the trials so that it does not have to rework the armour acquisition plan. It fears that, at this point in time, the Arjun may outperform the T-90 in trials. The MoD has confirmed the cancellation of comparative trials and says this is because you cannot compare apples and oranges, the Arjun and the T-90, which is not a tenable argument because they were always about to compare apples and oranges.

That’s all the story says.

So the question above should really be phrased as: Mr Shukla, what has happened in the last two years (when you said on Bharat Rakshak that the Arjun had serious problems) that has changed what you are reporting (NOT changed your stand, because, remember, my story does not indicate what my stand is).

That would be the intellectually correct question, and that is the question that I will answer, even though what I’m about to tell you is not yet in the public domain. But then, I’ve had access all along to everything that is not in the public domain, whereas most others work off public domain statements.

Let me tell you the story of Summer Trials, June 2005, Mahajan Field Firing Ranges: This, the Arjun team from CVRDE believed, was going to be the big moment when they would prove themselves. The five PPS Arjuns were going to fire before the highest-powered army team ever to witness Arjun trials. The team consisted of: Lt Gen Pattabhiraman, GOC-in-C Western Command, Lt Gen Nagaraj, GOC-in-C South Western Command, Maj Gen Pradeep Khanna, GOC 1 Armd Div, Lt Gen DS Shekhawat, GOC 2 Corps, Lt Gen GD Singh, DGMF… all of them were present.

It was a typical June morning in Mahajan… heat shimmers, the sun already high at 8 pm, temperatures already pushing 45 degrees. When the first shots rang out as the tanks started zeroing, the crews came out and told the trial team that the LRFs were giving wonky ranges. Totally wonky. Like indicating 600 metres instead of 2400 metres. Switches were also tripping, for no accountable reason.

As the generals twiddled their thumbs and drank lassi and ate kaajus, the CVRDE team tried to find out what had gone wrong. After a couple of hours, they reached the conclusion that the electronics were unable to operate in those temperatures.

The generals got into their helicopters and left for their headquarters. The army chief, who was to attend the trials next morning was rung up and told to call off the trip. The Arjuns packed up and left for Avadi, for a major re-engineering of their electronics, to enable them to function up to 60 degrees.

To make the picture even rosier, mobility trials had indicated that the problem with the Hydropneumatic Suspension Units (HSUs) hadn’t been resolved either. The pistons were not strong enough; major re-engineering was required by BEML and the Kirloskars.

That was the situation in June 2005.

It got even worse that December.

That was when five Arjun tanks were to go for comparative trials. The teams that were re-engineering the HSUs and the electronics weren’t able to finish. So, after a big ceremony, after five Arjuns from the production line were unveiled at a function in Avadi by the defence minister, the carpets were rolled up, the slideshow put away, and the tanks rolled back into the sheds for work to continue.

Trials were out of the question at that time.

That was when I was posting on Bharat Rakshak and saying that the Arjun project was in serious trouble. It was. And that is when, without any knowledge of what was going on, the Arjun Brigade was insisting that the tank was outstanding and it was only being scuttled by a vindictive army.

To turn around today, when many of those problems have been fixed in the Arjun, and say that, “wow, we knew we were right, Ajai Shukla was so so soooo wrong”, is a bit rich. Most people didn’t know what was happening then, because I didn’t think it right to report all those details. They only know what is happening now because I’ve told them that the problems are solved.” I was right then, and I’m right now. They were wrong then, even if they’re right now.

So to say, they knew how great the Arjun was is a bit like saying… about a kid in a remand home who eventually turns out good… “Oh, I know that kid was good and everyone who criticised and corrected him were wrong. He’s turnout out good, hasn’t he?”

People who have strong positions, without knowing the facts, are really just pamphleteers.

This is not the end of the story. The Arjun will still have more problems; the T-90 will resolve its own crisis. This story will continue to be reported. But the savants who have already decided the ending are invited not to read the intervening account!

Tuesday, 11 September 2007

The sprawling premises of the Heavy Vehicles Factory (HVF) in Avadi, near Chennai are the birthplace of the tanks that form the cutting edge of the Indian Army. The two major tank production lines here present contrasting pictures.

On the one hand is the T-90 production line, evidently the line of the future. Presently reassembling knocked down T-90 tanks that are shipped from Russia, this is where the bulk of India’s 3500-tank fleet could be manufactured once the domestic production kicks into gear.

The other production line is that of the Arjun. Newly set up in a giant shed at one end of the HVF, this is the line with limited prospects. After fulfilling the army’s token order for 124 Arjuns, which at the target rate of 50 tanks a year will be met by 2010, this production line will be looking for orders.

The makers of the Arjun tank, the Central Vehicles R&D Establishment (CVRDE), located a stone’s throw away from the HVF, believes that the Ministry of Defence’s (MoD’s) decision to cancel comparative trials this summer is a hammer blow to the prospects of getting a larger order for the Arjun. After three decades of failing to meet the army’s expectations, the Arjun would have needed to clearly outclass the T-72s and the T-90s in head-to-head trials to wrest more orders from a sceptical army.

The army’s strongest argument in favour of the T-90 is that from the purely economic viewpoint, the T-90, at an affordable Rs 12 crores apiece, seems a cheaper option than the Arjun, which carries a Rs 18 crore price tag. But the CVRDE disputes this point. If larger orders are placed for the Arjun, says Project Director, R Jayakumar, the economy of scale will bring down the cost of the Arjun to around that of the T-90.

Initial costs, say officers involved in the project, were high. HVF Avadi has machinery worth crores of rupees lying rusting; that was used to produce even nuts and bolts for the Arjun, when local industry was producing nothing. Gradually, over years, a network of local suppliers has been created, an industrial base that has brought down production costs, but is itself vulnerable to the stoppage of production.

Amphenol Ltd produces radio harnesses for the Arjun. Mr Guruprasad Bhat of Amphenol says that in anticipation of increased Arjun production, the company expanded its manpower and production and testing facilities at a cost of Rs 8 crores. Now Amphenol must recover those costs. And the larger the number of tanks that are produced, the lighter it can load its products. Mr Bhat explains that, “we’re proud to be involved in producing an Indian tank, but we’d also like to see good profits.”

The Secretary of Defence Production, Mr KP Singh, has told NDTV that the MoD has “kept the option of producing another 124 of the better version of the Arjun tank.” But that is not yet a firm order and, to benefit from the economy of scale, the overall size of the order must be clear from the start, rather than reached in a piece-meal manner.

This is a complaint that several manufacturers voice about the MoD. In the ongoing procurement of Light Reconnaissance Vehicles, the size of the order could be a whopping 8000 vehicles. The MoD has asked bidders to submit tenders for a firm order of barely 100 vehicles. Bidders point out that if 8000 vehicles are bought in small tranches, they will cost far more than a single large order.

The Mahajan Field Firing Ranges (MFFR), near Suratgarh, in Rajasthan, a hive of army activity between September and March, transforms into desolation during the summer months. During that interregnum, the emptiness, the blazing 50-degree-plus heat, the absence of water, and the unrelenting sandstorms make MFFR an ideal testing ground for equipment that the army proposes to buy.

Here, over the last 33 years, the Defence R&D Organisation (DRDO) has carried out scores of often-unsuccessful trials on India’s Arjun tank. It is here, during this bygone summer, that the MFFR was to host the mother of all duels: full-scale comparative trials, in which the Arjun tank was to be compared with the army’s workhorses, the Russian T-72 and the new-generation T-90 tanks. If the Arjun performed satisfactorily (nothing better was even imagined) the army would buy 124 tanks, a miniscule purchase considering that its fleet has 3500 tanks. This token order, worth Rs 2250 crores, is believed to constitute a face-saving closure to the three-decades old DRDO project that had spent Rs 300 crores on developing the Arjun.

But this long-playing tale has taken a rousing twist comparable with the most unlikely of underdog success stories. Recent technological breakthroughs in the Arjun project appear to have transformed what was an underperforming liability into something close to a world class 60-tonne Main Battle Tank (MBT) that could literally kick sand in the face of the Russian favourites. Army sources reveal that there was apprehension that the DRDO-built Arjun could outperform the Russian-origin tanks in all three determinants of tank ability: mobility, firepower, and protection. Now, the Ministry of Defence (MoD), at the request of the army, has cancelled the comparative trials.

Confirming that comparative trials would no longer be held, the MoD reasoned that it wasn’t possible to compare “a Maruti with a BMW”. The MoD’s logic that the 60-tonne Arjun couldn’t be compared with the 46-tonne T-90 is hardly credible; neither tank has gained or lost much weight since the comparative trials were ordered. The real reason for cancelling the trials is that if, in head-to-head trials, the Arjun proved to be the better tank, there was no way the project could be buried with an order of only 124 tanks. Instead, the army’s entire tank procurement programme would need to be reworked; the Arjun would take a sizeable bite out of the T-90’s share of the pie.

That would be a huge boost to India’s indigenous tank programme, but a blow to the army’s preference for the Russian T-90. Even as the Arjun’s designers fume at the Central Vehicles R&D Establishment (CVRDE) near Chennai, army chief General JJ Singh will visit Russia next week. High on his agenda is a billion-dollar deal for the purchase of 347 more T-90 tanks. Next month, Defence Minister AK Antony will be in Russia too; the T-90 deal could be signed during his visit.

It is ironical that the MoD, which financed and supported the Arjun programme through three decades of failure, has turned away just when the tank seems to have overcome its major problems. After a miserable failure in 2005, when the tank’s electronics proved utterly inadequate, the turning point came last year. In summer 2006, firing trials established, in the words of the army’s own trial team, that the "accuracy and consistency of the Arjun tank was (sic) proved beyond doubt". Later, the MoD stated to Parliament’s Standing Committee on Defence that, "Arjun's firing accuracy is far superior to the other two tanks." This summer, the army raised another objection: the Arjun should be able to drive for 20 minutes in six feet of water. The CVRDE has managed that as well.

At the Arjun test track at Avadi, I drove the tank for an hour over a series of obstacles that would stretch any tank in the world. The Arjun’s chronic problems with the suspension and with overheating were nowhere in evidence. While this hardly constituted a serious trial, the Arjun surely deserves to be put through comparative trials, if only to empirically determine which of India’s options is the best. This is especially important in the light of many reports that the T-90 is facing serious problems with its electronics in the desert heat. The army is planning to air-condition all its T-90s, a situation that is unlikely to work.

For now, despite the Arjun turnaround, its future seems uncertain. From October 07, the army will put the tank through trials; without the baseline parameters that would have been provided by the T-72 and the T-90 in comparative trials, its designers fear that the tank could be accepted or rejected based on arbitrary criteria.

If there is a silver lining in the dark clouds over the Arjun, it is in the fact that army officers and jawans who are involved in the tank’s development and trials are developing confidence in the Arjun. Once the tank enters service, this constituency could grow in size and influence. As Secretary of Defence Production, KP Singh observed, “When the army uses this tank, who is to say what they think about it. God knows, they may just fall in love with it and decide that the entire production line should be Arjuns only. Who knows?”

India’s Ordnance Factories Board (OFB), under fire from the military as well as the Ministry of Defence (MoD) for producing too little, too late, at too high a cost, believes its primary customers judge it too harshly. Instead, the OFB points to its recent success in bagging a Turkish order for air defence ammunition, which was won in the face of international competition from Sweden and Italy.

OFB Chairman, Sudipta Ghosh says that the OFB wants to boost profits for modernizing its factories and in-house R&D, but the bulk of its products goes to the defence forces on a no-profit-no-loss basis. The only profit allowed is on sales to civilians, police and paramilitary forces, and export customers like Nepal, Myanmar, Sri Lanka and now Turkey.

Now, Sudipta Ghosh has proposed setting up a specialized marketing corporation to maximize profits from non-military customers. The OFB Chairman told Business Standard, “Now we have a plan to create a marketing corporation within the OFB, something like the Railways’ IRCON; we can use this corporation to get more flexibility in negotiating with customers.”

The Defence Minister, it is learned, has agreed to the OFB’s request for a marketing wing. Secretary of Defence Production, KP Singh, explained that this would provide the OFB, traditionally a manufacturing body, with greater marketing acumen. Mr Singh pointed out that a marketing corporation “can be more flexible than a government factory. A marketing wing would be able to promote its products better, send people abroad more often… have the flexibility to do exports in a better manner. So the minister has approved this proposal.”

The MoD points out that besides exports, a marketing wing would also provide the flexibility to be able to deal with civilian buyers, where prices fluctuate according to market forces. The Articles of Association are being worked out, but MoD sources indicate that the marketing wing will be formed from within the Ordnance Factories, and staffed by a mix of OFB officers and marketing executives from outside.

The MoD has its own interest in boosting OFB profits. Last year, about half of the OFB profit of Rs 663 crores was ploughed back into the defence budget; the OFB got just Rs 300 crores for modernizing its plants. When the 2007-08 budget was being formulated, the OFB asked to retain all its profits for modernization, as well as an additional Rs 340 crores from the defence budget. Instead, the 2007-08 budget estimates provide for taking back Rs 202 crores from OFB profits. That’s a gap of Rs 542 crores between what the OFB asked for, and what it is getting.

In the light of that, the OFB hopes that a separate marketing corporation will provide it a route for making and parking profits, without having to surrender them to the MoD. The OFB Chairman explains that, “Today I am a complete departmental body so I cannot retain any surplus with me. But if I generate this surplus through the corporation I need not return it to the government, I can keep it, use it for my improvement… and for buying technology from abroad. Today, for each and every thing, I have to go to ministry and take its permission.”

There is some hesitation within the MoD, however, in allowing the OFB too great a leeway in charting its own commercial path. Top MoD officials question the OFB’s eagerness to accumulate funds for modernization, when the MoD says that it will provide all the funds necessary. Some restrictions have already been loosened, such as the limit of Rs 10 crores per year on R&D expenses.

As organizations like the OFB and the DPSUs pump more money into research, the MoD will be dealing with the blurring of lines between purely research-oriented establishments on the one hand, like the Defence Research and Development Organisation (DRDO), and organizations like the OFB and the DPSUs on the other, which were set up initially as manufacturing agencies.

The short 40 km drive from New Delhi to the Ministry of Defence’s (MoD’s) Ordnance Factory at Muradnagar was a journey back in time to 1943, when the British first set up the factory. Two old women, squatting next to a charpai, wound a length of jute rope around a piece of metal shaped like a bomb; striking a matchstick, one of them set the rope afire. I was told they were “heat-treating” a bomb for the Mirage 2000 fighter. Little has changed since 1943 in the factory’s manufacturing methods; little has needed to. With captive customers in the Indian military who resentfully pay a “no-profit-no-loss” price for the goods produced in the 39 OFs, there has been little incentive to provide better products at cheaper prices.

Until now, that is. On 18th May 07, the MoD top brass handed out an ultimatum to a gathering in New Delhi of General Managers of all OFs: gear up or perish. India’s next army chief, Lt Gen Deepak Kapoor, intoned a list of complaints against the OFs that he said the army had conveyed many times before. Defence Minister AK Antony spelt out the bottom line, warning the managers, “The future of the OFs depends upon the decisions that you will take during these deliberations.”

Mr Antony’s exhortation to change is not the first that the OFs have heard. But with the MoD now serious about a greater role for the private sector in defence production, change is in the air. Before long, as many as 15-18 private companies could be nominated as Raksha Udyog Ratnas (RuRs), providing bitter competition for OFs and defence PSUs.

The Ordnance Factory Board (OFB), based in Kolkata, has already proposed bold steps towards rejuvenating the OFs. Mr Sudipta Ghosh, Chairman of the OFB, has told Business Standard that he has approached the MoD with the following suggestions:

• The 39 OFs switch from their traditional, non-commercial system of “no-profit-no-loss” accounting to the commercial accounting systems that most companies use. This would involve each OF preparing a proper Balance Sheet, and a Profit & Loss Account.

• Instead of the present “no-profit-no-loss” pricing of products, market dynamics should determine prices. The OFs should be allowed to make profits on items where they are competitive and cross-subsidise items that require a subsidy.

• Profits will be used for modernising existing OFs in order to provide a greater share of the military’s requirements.

• Selected OFs be nominated as R&D centres, where products could be improved or new products developed.

• OFs will provide customers with warrantees on all products, with immediate effect.

These are revolutionary changes for the MoD’s “departmental factories” which will churn out some Rs 6500 crores worth of military equipment this year, ranging from clothing to heavy tanks. Over the years, the crippling combination of cost-plus accounting, assured customers, mediocre managers, highly unionised labour and the shutting out of competition has created the ultimate manifestation of the license raj.

The MoD has welcomed the OFB proposals cautiously. Secretary for Defence Production, Mr KP Singh says all OFs will implement commercial accounting as soon as the Institute of Chartered Accountants of India (ICAI) and the C&AG give the green signal. Sources in the C&AG department say this could happen very shortly.

Mr KP Singh sees the proposed accounting systems as a useful way to judge the OFs’ systems and performance, a baseline by which, “you’ll come to know what is the health of a particular factory vis-à-vis other factories. Which manager is doing better and which manager is doing less.”

But Mr Singh has ruled out the more radical suggestions of profit-making and market-determined pricing. The MoD may wish to insulate the OFs from free market competition, but this appears to the OFB like imposing full corporate accountability, without giving the freedom to operate like a regular corporation.

(Next, in Part II: Ordnance Factories setting up a marketing corporation)